FirstGroup rejects plan to sell Greyhound coaches and school buses

Shareholder Sandell Asset Management had argued selling US business would cut debts and boost share price

Bus and train company FirstGroup has dismissed a plan from one of its biggest shareholders to sell one of its US businesses to pay down debt.

Sandell Asset Management, a hedge fund with a 3.1% stake in FirstGroup, had urged the board to sell its Greyhound coach business and school bus division, arguing this would cut debts and boost the group's languishing share price.

In a statement on Wednesday, First Group rebuffed Sandell's proposal, saying it contained "a number of structural flaws and inaccuracies".

"The board of FirstGroup notes the recent press speculation and confirms that it has received a proposal from Sandell Asset Management," it said. "The board is open to all means of enhancing long-term value and welcomes the views of the group's shareholders. The group has engaged with Sandell several times, reviewed their proposal in detail and believes that it is not compelling and contains a number of structural flaws and inaccuracies."

FirstGroup has been struggling with almost £2bn in debts since 2007 when it bought US-based Laidlaw, the owner of Greyhound coaches and yellow school buses. The acquisition was part of an ambitious expansion programme that has seen the Aberdeen-based company go far beyond its origins in Grampian municipal buses to become one of the world's biggest transport companies with 120,000 employees. But its growth plans were derailed last year when the UK government revoked a decision to award it the lucrative contract to run the west coast mainline rail franchise between London and Scotland, following a botched bidding process.

In May the group tapped shareholders for £615m and cancelled its dividend, causing its share price to drop 30% in one day.

Hedge fund boss Tom Sandell argued that selling off the American assets would deliver "a 50% upside to shareholders" and allow FirstGroup to shake off its "historic poor performance" by focusing on its UK bus and rail business. FirstGroup's shares rose over 4% on Wednesday to 120p, after the board said it was sticking to its turnaround plan set out in May that would "deliver superior value for shareholders compared to alternatives that were considered in detail earlier this year, and which remain under review". The next review is slated for FirstGroup's capital markets day on 23 January, when its new chairman is in post. The transport group last week appointed Aviva chairman John McFarlane to take charge in the boardroom, ending a six-month search after Martin Gilbert ended his 27-year reign in May. McFarlane, who joined the board last week, becomes FirstGroup chairman on 1 January. FirstGroup's chief executive, Tim O'Toole, has argued First Group are making progress on their turnaround plan: last month the company reported pre-tax losses had narrowed to £8m in the six months to the end of September, compared with a £20.6m loss in 2012.

Gerald Khoo at Liberum Capital said FirstGroup would be better off holding onto Greyhound for now: "We struggle to see how a strategy of large scale disposals creates value. Selling underperforming assets when they are cyclically depressed is unlikely to realise more value than restructuring them and seeking an exit at a better point in the cycle, if appropriate."

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